The Debt Ceiling

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What’s so important about October 17th?
That’s the day officials say the U.S. will run out of money. Defaulting on our debt would mean the government’s credit rating could be downgraded again and cause a default on U.S. Treasury bonds, which many Americans have as part of their retirement or investment portfolios. The dollar could crash. Not to mention, the low interest rates we’ve enjoyed for home-buying, credit cards or business loans would also rise very quickly. This debt issue has the potential to set our economy back into a tailspin. And not just us…Treasury bonds and the dollar are cornerstones of the global financial system, so it could affect the whole world if we don’t address it. It’s basically a financial doomsday scenario.

What do you think is going to happen?
I guess we’ll find out in a few days! But the debt ceiling is changed by Congress. They can either pass a standalone bill or include it in another piece of legislation as an amendment. Congress originally created the debt ceiling in 1917 during World War I in an effort to limit federal borrowing. Since 1960, the debt ceiling has been raised 78 times. It’s a simple matter of amending the law, but that means coming to a compromise in Congress.

And this is where the government shutdown comes in.
Exactly. There’s a standoff in Washington as Republicans and Democrats argue about the federal budget. Hopefully, they’ll at least come to a temporary agreement before Thursday.

Mellody Hobson is President of Ariel Investments, a Chicago-based money management firm that serves individual investors and retirement plans through its no-load mutual funds and separate accounts.  Additionally, she is a regular financial contributor and analyst for CBS News.

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